1. Introduction for 15.S12 Blockchain and Money, Fall 2018

the following content is provided under a Creative Commons license your support will help MIT OpenCourseWare continue to offer high quality educational resources for free to make a donation or to view additional materials from hundreds of MIT courses visit MIT opencourseware at ocw.mit.edu welcome welcome if you have a desire to learn a little bit about blockchain and its intersection with the world of finance and money and you're looking for 15 . s 12 you're in the right place if you're here to not do that and just hang out and have a good time I guess you

still hopefully are in the right place because we're gonna have a good time this semester my name is Gary Gensler I'm a senior lecturer here at MIT Sloan I'm also an advisor over at the MIT Media Lab and I've spent a lifetime around the world of finance and money and public policy and I've been at MIT this last eight months and we're gonna learn a lot together about blockchain and money we're gonna have a little bit of fun here and see what we're gonna do so we're talking about blockchain and money that's where we are

by the way I do cold call I do call on use if you want to leave now I understand because I want to have an interaction a little bit about it so my first question for the class for everyone whether registered or not how many of you have ever owned a cryptocurrency wait wait let's see the yacht's it seems like it's about 45% of you or so all right Livan you want to keep your hand up long and how many of you have ever worked on any blockchain related projects in an entrepreneurial setting or corporate

setting anywhere all right good so a better third in the room good all right so you all know probably more than I do but I'm gonna give it a shot I'm gonna always start every week with what are the study questions for the week how many of you actually got the syllabus this is not gonna be graded assignment I just have to have a sense of who's who actually got this syllabus so good many of you and how many of you actually did the two readings it's not graded I just got gage the class oh

thank you thank you right those grades down by the way no no all right so the two main questions for this week's lecture really is what is blockchain and why might it be a catalyst and I emphasize the word might it be a catalyst for change in the world of finance we could talk about a lot about things outside of the world of finance and blockchain may indeed have a lot of applications outside of Finance but I've chosen to try to just narrow the scope a bit so this semester is really about blockchain and money

or blockchain and finance and secondly you will see index cards on every one of these round tables one assignment by the end of the class you could do it now or later I would like each of you to anonymously write on the court what you want to achieve in this semester it could be anything from this class from learning about blockchain from making money on Bitcoin from I don't care if you tell me it's meeting your future spouse I just like what do you want to achieve in this class I can't help you on the

third but I will try to help you hone the things I can help you ID and Sabrina and Toledo will collect them later and next Tuesday will tell you the results what is it that you want to achieve in this class and then we'll see at the end of the semester if we've done that so that's just a way to help guide me help you so that's that's what we're trying to do and so what were the two readings one was a little thing I did and one was a thing I did with some of

my colleagues and Tom since I know you would you take out of the readings did you have a good summer did you raise your head did you own Bitcoin know who in the class read the readings and took something different than Tom he said there was potential and your first name okay how many agreed with the line this is a vote they're just two or three how many grids with Tom there's more and how many of you're too shy on the first day to put your hands up most so I'm going to start and go

back the internet how do I sort of I've come about this and sort of thought about well what is the WAP chain what is it really about well the internet started many decades ago before most of you were born but 1974 I mean there's some predecessors even from the late 60s the ethernet which is really how two computers communicate and then you had tcp/ip which was really the Internet Protocol of multiple computers compute that talking to each other and then later on in 1990 how do we move forward does anybody know what HTTP is we're

at MIT your first name would be helpful Erik Erik it's a protocol for communicate with content web content hypertext Transfer Protocol eek anybody know who's associated with tcp/ip it was a company initiated by MIT I don't know if it was a company in Sochi over there mighty but Vince Cerf may have had some association with it mighty so these are the first three layers and then there were companies commercialization 3com and cisco and of course amazon it's still around today but there was something else going on how do we commercialize the internet does anybody know

what this scene is from good thought good thought first pizza sold by Bitcoin but no all right movie hackers the net do you know have you ever seen the movie it's not a good movie so this is the opening scene of the net and yes that's Sandra Bullock and the years 1995 it's a cyber thriller you know a president's involved the Defense Department's involved and so forth but actually Pizza Hut is associated with the very first sale online sale anywhere in the world they started something called pizza night this was the screen by the way

if you wanted to go on you could order your pizza and and but there was one problem does anybody know what the problem with was Pizza net I mean maybe there were multiple problems no Ilana I've caught on you you couldn't pay online nobody figured out how to move money online you had to pay when you showed up with the pizza so now I'm going to talk a little bit about cryptography we're going to spend a lot of time on cryptography it's crypto currencies and the like what's your name Gigi Gigi Gigi what's cryptography cryptic

all right now you got it you got to start there anybody want to help GE out does anybody want to help you yeah tell me your first name we're gonna ask we're gonna figure out how to have everybody have name plates by next week but we will work with Ryan and do it that way so it's how do you encrypt something so it's not detectable by others or in essence it's communications in the presence of adversaries you have an adversary who wants the communication you want to communicate and not let your adversaries know that communication

and this is this is true for ancient times so in ancient times there was something called the cypher and this was a way that you take a piece of leather or Peetha cloth and have a lot of letters and both sides you'd encrypt and decrypt because there were different measurements of the cylinder has anybody seen the movie imitation games all right the Enigma machine now it the movie was wonderful because it said Turin cracked it and he did help crack it in an automated way but actually the Polish government had cracked it in the 1930s

before they fell to the Germans but and and touring built on all of that and cracked it further and then in the 1970s and this was here at MIT to some extent there's private key public key cryptography which I'm not going to dive into today but it's it's the heart of Bitcoin and blockchain it's at the heart of the Internet but it's about the key thing is communications in the presence of adversaries how do you keep a secret when everybody wants in and get that information and there's a long history and mi t--'s at the

center of a lot of that a lot of early cryptography failed on the Internet in the early 90s and late 80s David cha and others tried to do things and we're not going to debate these today but you'll have one reading I think it's either next week which will give you that history and it's worthwhile knowing about the history of failure but cryptography is the reason why the internet works today does anybody want to tell me what SSL and TLS is do we have any computer scientists remember your first name encryption using symmetric keys which

is public key cryptography right so it basically uses asymmetric cryptography which we're going to talk about two lectures from now but it secures the whole Internet so all of a sudden you could deliver the pizza and get a passcode and I have to tell you I never knew how this worked before I was at MIT so PayPal came along in 1998 I mentioned this a whole bunch of other digital currencies then failed but some of these people who will read later like will read Nick Sabo's piece on smart contracts later Adam back who created hash

cash some of these innovations were what Satoshi Nakamoto later used some innovations which were really helpful and worked where a leap a and M paisa does anybody know what M pace is in essence they found out in Kenya this was ten twelve years ago that people were trading mobile minutes they were unbanked but they had cellular phone and they were trading their minutes as a form of currency and Safaricom realized that and said way we could help people be part of the digital economy even if they're unbanked and in Africa today 1/2 of the adult

population according to world bag figures is still unbanked but half of that half has mobile phones and pace has 20 million customers in Kenya right now so it's a it's a form of money that's kind of swapping mobile minutes but the riddle remained how do you move money on the internet where in essence how do you move value peer-to-peer without a centralized intermediary and that's the core of blockchain technology so who solved the riddle and they're ready to tell me who solved the riddle who solved this riddle now have you you you're wearing a t-shirt

that says Quentin Tarantino so I think Quentin Tarantino should solve over it all what's that what's your name so a peer-to-peer cash this is the actual doc top of an email that was sent out on Halloween 2008 by Satoshi Nakamoto we don't actually know who's Satoshi Nakamoto is but it's a study question a few lectures from now to ask you to tell me who you think Satoshi Nakamoto is so I won't ask that now and he started with a very simple sentence in his email I've been working on a new electronic cash system that fully

peer-to-peer with no trusted third party it's kind of a modest statement and so the question is is this another internet layer we're gonna explore that this whole semester I don't I don't really have the answer I don't think the best minds at MIT could really yet tell you there are some who are maximalist and say yes it will be and there are others who will say no no no and in this course we're gonna we're gonna review the minimalist and the maximalist we're not we're not kind of try to Center it in one place but

that's the key key kind of question so what is a blockchain we're gonna do this in a lot of lectures but I'm gonna try to do it in this short version so it's time-stamped append logs meaning you can add a little bit of information to this and it's time-stamped so these are these blocks being added Satoshi did not invent blockchain there's way earlier does anybody want to guess what what it was you're gonna have a reading about this later but early 1990s what's that Midori Stuart Haber Stuart Haysbert worked for Bell Labs right so one

of your assignments it's not gonna be a gray to decide which it's gonna be a fun assignment could any of you I'm gonna say by next Thursday just have some fun find the longest and timewise longest running blockchain it's not Bitcoin and it's been running since the mid 90s and your clue is the New York Times and we'll discuss it next Thursday but this time stamped block block block block of data creates a database an auditable database and we'll talk about Ledger's particularly next week but we'll talk about Ledger's all throughout this course and how

it changes the world of Finance now it's secured by cryptography because cryptography remembers communications and making sure adversaries can't pick you off we're gonna learn about hash functions and hash functions that are a really important part of cryptography and initially for databases and how to search and store information and database but in this circumstances hash functions were the way to not only append the next block to the prior blocks but really importantly to compress data to make it more manipulatable and to verify it and as I've written here tamper resistance and the integrity digital signatures

which has to do the public key private key cryptography there is no prerequisite of this course you do not have had to have taken computer science cryptography algorithms if I could learn a little bit about hash functions and asymmetric cryptography these are the two key important sides and will we have enough computer scientists in this room that can sort us out if I say the wrong thing right mid doors hopefully and then consensus so there's a really important part of blockchain is how do you decide who appends that next block because when I went back

here there's block or block each of these blocks somebody has to decide who appends who gets to pick the next block and that's what's called consensus protocol and there's why debates about consensus protocol and will talk a lot about consensus protocol but in essence it addresses something a term called the cost of trust and we'll talk about Byzantine generals problems which is another reading the Byzantine generals problem was laid out as a sort of mathematical game theory issue some thirty as years ago that's what Satoshi Nakamoto solved was this last part that the Byzantine generals

problem pizza for bitcoins a year and a half after Satoshi Nakamoto laid out blockchain Bitcoin somebody sends an email and you'll get these slides but this is the real live email I'll pay you 10,000 bitcoins for a couple of pizzas I I just want some pizzas the guy who sent this he says I like onions peppers sausage mushrooms Lazlo now catch the date this is May 18th and he's offering 10,000 bitcoins of 2010 but the key line is what I'm aiming for is getting food deliver in exchange for bitcoins nobody had used bitcoins as a

medium of exchange 16 months into its existence nobody had used it to buy something and Laszlo is a computer scientist in Florida was just kind of interested and he put this out on an email list three days later he still doesn't have his two pizzas so nobody wants to buy me a pizza is the Bitcoin amount I'm offering too low another day goes by he gets his pizzas and he post pictures so here's a picture of his child reaching for those Papa John's pizzas anybody know what those 10,000 bitcoins were worth back in back then

Chicago anybody want to say back then what's that $41 and last I was saying two pizzas are probably worth 25 to 30 because there's a whole email thread he kept saying why won't anybody get me my pizzas you could make money on this today or earlier late yet last night 66 million dollars yeah so it's a cute story may 22nd every year is called pizza day or Bitcoin pizza day or something so so what is block taint technology these are my words but they're sort of picked from the literature and so forth it verifiably moves

data on a decentralized network and the economics of blockchain technology are really around that verification and the economics of verification and the economics of networking and in many ways blockchain adds certain costs to the verification through this consensus protocol that we'll be studying but it lowers some other costs of verification because you're not relying on a centralized Authority so it's really a trade-off of cost of verification I don't think it's I'm not a purist that says it's better or worse but it's it's a trade-off of costs of verification through decentralized networks the data can be

value like Bitcoin was a money system where the data can be actually computer code and we'll learn a lot about smart contracts and you could have the data being verified computer code and algorithms my world finance this directly goes to the plumbing of Finance because finance is fundamentally about moving money and risk through a network and that network is the seven billion people that live on this world it's moving money and risk and you've all taken finance courses or many of you have and it's the intermediating of money and risk throughout our economy but there's

a whole host of challenges and over the course of this semester we'll talk about this challenges technical commercial and public policy hurdles will they be solved will they not be solved but it could be a catalyst but we're not sure yet for change in the world of money and Finance so does anybody want to tell me the role of money in society and tell me your first name come on Tomas between people all right medium of exchange got that one somebody give me a second yellow shirt savings all right so that would be a store

of value yeah third I'm sorry the gentleman here Wow all right there we go there we go so we're gonna spend some time next Tuesday talking more about money and the role of money in the history of money which i think is sort of lays a foundational piece of this what about the role of Finance I've already sort of said a few things about that but and I'm sorry I don't know your name but I'm right here the woman yeah role of Finance sorry I'm not going to tell any financial finance professor what your answer

is to raise money so keep going I'm gonna anybody else want it can connect savers and borrowers connect savers and bars so connecting is sort of moving money moving valuations so that's the pieces of it sort of moving making valuations I use the words moving allocating and pricing pricing is the valuations of money well let's not forget it's also about risk when you buy insurance that's a transference of risk when you buy an equity stock that's a transference of risk if you enter into a complex credit default swap it's a transference of risk so finance

is not just the movement of money it's the movement of risk as well throughout the economy and I always think finance I always I've thought this when I was at Goldman Sachs for 18 years that finance sits at the neck of an hourglass and it's why it collects so much economic rents from society because when you sit at the neck of an hourglass and billions literally trillions of grains of sand go by if you collect some of those grains of sand you get uber wealth and that's those are for other classes but finance can collect

a lot of economic rents the financial sector though has a bunch of challenges we'll have one lecture later in the semester about some of those challenges and we have a reading I think sheila bair wrote something recently that I asked you all to read later in the semester but we'll talk about the financial crisis and some of the problems but it's had a lot of crises fiat currencies have a lot of what instabilities of course we have centralized intermediaries as I laid out and we'll talk about collect a lot of economic rents so there's there's

opportunity blockchain has real opportunity to kind of come under this world of Finance and maybe do some things better central banking also have a bunch of legacy payment systems and there's legacy payment systems or slowly adapting but it's slow and why did Ally pay do so well in China is part of the story because there were so many unbanked just like m-pesa in Kenya but here in the US we still pay 2 and a half to 3 percent for our interchange charges for Visa MasterCard and the like and a lot of clearing and settlement still

has a lot of counterparty risk and one that I care deeply about Financial Inclusion there's still 1 point 7 billion people in this world who are unbanked and so we don't think of it as much in the developed countries but it's certainly true in many products even here in the US and these are to me the opportunities finance is 7 and a half percent of the US economy that's one and a half trillion dollars of revenues so any of you that are thinking about entrepreneurial opportunities the payment system just here in the US is a

half a percent to one percent of our economy that's 100 to 200 billion dollars or revenues I think these is about 18 billion just you know but if you you know when you add up the whole payment system that's a hundred to two hundred billion dollars in payment revenues so that's kind of the opportunity can blockchain technology come in it's got problems it's slow its its performance issues but can it compete with that here are some of the problems the financial sector would say with blockchain these are real live things that we're going to study

later in the semester they say it doesn't have the performance scalability a modern payment system you need to be able to move about a hundred thousand payments a second a modern securities clearing the the Depository Trust Corporation the Securities and Exchange Commission says you do about thirty thousand transactions a second but we need you to scale and your computers and everything have to be resilient to a hundred thousand transactions a second Bitcoin you can do about seven transactions a second visa currently depends on the the second does anywhere from twenty two seventy thousand a second

yeah so it's just a sense of scalability and performance we might get there it might be three to seven years away I'm optimistic but there's still a bunch of performance and scalability issues privacy and security blockchains by their nature or public so they're not fully censorship resistant but there's a lot of innovation about making them more private but then that makes the public sector a little nervous interoperability they don't necessarily work yet with other legacy systems or with each other the internet one of the great innovations of the internet it became interoperable that all of

these different websites could kind of speak with each other governance is a very big issue we'll talk about and one of the things about governance is it's hard to update the software of a blockchain because if you create a decentralized where no one's in control no one can collect economic rents you also don't have sort of somebody with the ability to necessarily update the software and we'll talk later about how Bitcoin updates its software and what Bitcoin core developers are and so forth but Facebook you do know one thing though there there a company that

collects a lot of profits and economic rents off of their two billion members they know how to update their software it's it's a governance issue that's a real life challenge and that's why the financial sector says I'm not sure this works this is ready yet for me and then thus what are the commercial use cases and what are the public policy issues so right now the financial sector favors permission blockchains versus permission list this is going to be about four weeks from now we'll kind of go through these two differences but I want to just

frame this briefly permission blockchains have a noun group of people who actually participate the half of you that said you've owned Bitcoin you know it to be something where anybody can update the ledger permission blockchains you can't do that in essence you pick the three or twenty the Australian Stock Exchange is updating their clearing and settling they announced they're doing a blockchain project they're doing it with digital assets and they're using the hyper ledger blockchain which is an IBM software open source software but the Australian Stock Exchange is going to put it on three computers

which is called three nodes that they control all three of them the Depository Trust Corporation is looking at blockchain inspired solutions for some of their data warehouses but they too are gonna control the nodes I'm just giving it that's permission blockchains there's nothing wrong with that that's just how they are the they're looking at this permissionless block chains are like Bitcoin unknown participants securities based on incentives a crypto currency and crypto economics crypto finance is about two hundred billion but it you know you have to update these slides daily two days ago it was two

hundred and thirty billion and this little pie chart is a little over half as Bitcoin the next slice is something called if the and then ripple and down the line we're not going to spend a lot of time in this this semester if you if your goal is to how can you profit and trade a trade Bitcoin and day trade ether god bless go prosper you could stay in the class I just won't give you much advice on it you know this is not a crypto investing centered class but I'm okay if that's what you're

doing does anybody know what the worldwide capital market size is anybody want to guess you know this is 200 billion what's it look like I've already said it's modest hundreds of trillions global equity about 80 trillion global bond and debt markets 250 trillion so it's still quite modest compared to that broad breadth of capital formation and gold if bitcoins digital gold what's the value of gold all the gold that's ever been 7 trillion so just give you sense of scale so there's also something that's interesting about this space is that it's out sized public attention

even as evidenced by the hundred of you in this room versus the size it is real relative to the capital markets today you know there's a bunch of public policy issues we'll have a lecture I'm a former regulator I ran the Commodity Futures Trading Commission so but this course is not about regulation though we have to always come back to regulation we always have to infuse what we're doing with the regulation but let me just give you a little framework and then you'll have to be bored and a handful of weeks and read I gave

some congressional testimony on it yes it will be required reading sorry but it's guarding against illicit activity a lot of Bitcoin and crypto currencies started out in the cyber Punk sort of movement and and libertarian movement so forth and it is true you can use this for illicit activity absolutely but I would say crime is not new just the mechanisms and means are new and and so the criminals yes will use this and have used it for a listed activity financial stability central bankers around the globe sort of will this shape finance well it's only

two hundred billion the financial markets are three hundred trillion plus not yet is generally what they're saying but for some countries it's a way to get around capital controls and so for those countries worried about capital controls it's a very real and live set of issues and then protecting the investing public and when we do this in a few weeks I'll go through each of these the investor protection issues and yes the sec how we test and and the like for those who wish to do their own initial coin off right now give some you

know broad sense of what the sec is trying to accomplish but it's a moving target so this is a very interesting as opposed to many of your sloan classes or your c cell classes or media lab classes this is a very unsettled area of public policy so it makes it interesting and and and and if you all go off and form companies you will actually be helping sort of set the the the edge of that public policy of debate I had always say just remember poet Riley the duck test this is a poet Indiana poets

those that aren't from the US might not know the duck test but basically if it quacks like a duck and walks like a duck it's a duck so whenever you're thinking about public policy folks like myself who once was a regulator we think in the duck test and then we secondarily think about the actual words in the congressional act you know where's the common sense and if it quacks and walks like a duck it's probably a security or it's probably this or that the incumbents like this Linus in the corner are eyeing this space because

there's a lot of volatility and Wall Street makes money on volatility volatility is the friend of Wall Street it might not be the friend of investors but it's a friend of Wall Street they also like the trading volumes and the spreads coinbase the largest crypto exchange here in the US has 20 million accounts they might not all be active but that's the size of Fidelity's membership or account list and twice de Shaw and Robin Hood how many of you have ever used Robin Hood is a trading app Wow half of you so you know free

trading right 5 million members for those who don't know you can download Robin Hood and you can trade stocks for free no Commission and if anybody's interested show up and I'll do office hours when the hell Robin Hood commercializes they commercialize your your order flow and they make money without charging your commissions but it's a sort of wonderful app Millennials love it 5 million members already so you better believe de Shah and the incumbents are worried about things like that the startups are also more willing to beg for forgiveness from regulators they're willing to sort

of take risks and beg for forgiveness whereas incumbents tend to have to ask for permission so there's an unlevel field that always it's a asymmetric business set of risk about regulatory risk not always I'm not like crying for JP Morgan I mean the big incumbents have also they have their advantages and coinbase is becoming an incumbent rather than just a you know startup in a sense and we'll talk during the semester about some of the incumbents where we're probably going to get Jeff sprecher here in mid-november he's going to talk to you about what IntercontinentalExchange

in the New York Stock Exchange is doing with Starbucks and Microsoft and the like the financial sector use cases I'm not going to go through these but this is the second half of the course is going to go through each of these and we'll do one to two sessions on each payment system central bank digital currency secondary market trading the venture capital and initial coin offering space we'll do two a course on that and move through so what are we gonna do in this whole course basically our goal is to learn the fundamentals it's about

roughly the first half of the course pivot to two sessions on the economics we're gonna be talking about the economics throughout the whole course but I want to I want to really just focus drill down on the economics of 1/2 of the discussions and then riff through the financial space for the second yeah that's our journey together to me it's for anybody who wants to gain critical reasoning skills this is not just kind of a hey this is going to change the world and revolutionize everything class and so I basically think of an old Defense

Department term called ground truths it's when the general doesn't really know what's going on but needs to figure it out and needs to talk to that you know that that corporal on the ground who's got dirt you know all over woman and it's been shot up and says here's the real ground truth we're gonna try to talk about ground truth in this in this in this class and separate the mere assertion from the hype and some of your readings will be some real Bitcoin and blockchain minimalist from Nouriel Roubini that uses words I'm not supposed

to repeat on a recording about this stuff to Paul Krugman who and and Joe Stiglitz and other Nobel laureates who say no it's not gonna work or Warren Buffett to to maximalists we're gonna we're gonna try to cover both sides Larry Lessig is honoring me because he's in the back of the class who's an enormous Lee esteemed professor from Harvard I didn't know Larry was gonna be here and I did the slide before but in 1999 I think you wrote this book Larry is that right code and other laws of cyberspace I put you in

though but I think it's worthwhile to think about Larry's four bits here and I don't know Larry if you want to say anything but I'm gonna try to infuse this course in just how you think about this the tech we're at MIT the technology and we're gonna get you a lot of technology if you want more than I can give you is is is a former finance sort of type my whole life there's gonna be a bunch of computer science people in the class we're gonna hook and you up together with the folks from the

Media Lab and see Sal and and try to connect you to the technology side if you want to swim deeper in that pond but the technology really really matters and that's why we are going to go through hash functions and go through asymmetric cryptography and so forth from a business perspective markets matter why is it that incumbents or startups or are not doing this and that why is it ten years in and nobody's got an enterprise-wide solution yet to payments that use block J the law matters the public policy side matters and the forth of

Larry's layout social norms that's a little harder for me to teach that's not what this class is about but it is also a flex all this it's not just the technology the markets and the law so it's not just a three-legged store it's kind of a four legged stool how'd I do Larry I really didn't know Harry is gonna be here so but I wanted to give you a framework for how your faculty member thinks and will be on this journey together range of perspectives we're not gonna be a Bitcoin minimalist or maximalist I'm probably

to be self disclosed here a little bit center minimalist on Bitcoin smart contract minimalist max list I'm probably pretty Center Larry's probably a little bit center maximalist I'm guessing so you're still you're still center or Center minimalist what smart contracts and then blockchain maximalist or minimalist I'd say a few weeks ago I was kind of Center maximalist and I'm sort of skidding back to the middle permissioned blockchain I'm a little bit more you know and there's some in here Allah is one of your Sloan cohort that you might know six months ago when we met

was working on a permissionless system and now you're working on a permission system you have a startup yeah cuz like you've bounced up into the market realities is and we're gonna talk a lot in this course about critical thinking about when do you really need the advantage of a decentralized peer-to-peer system where the costs of trusts are such that that's the right way to go but I am one who thinks that there's also so much economic rents in the financial system that's that one and a half trillion dollars of revenues or seven and a half

percent of our economy or just two hundred billion in the payment systems for instance that there may be times that you don't really need a decentralized system but it just might be your opportunity to tuck in underneath all of those economic rents and all those revenues now in Vince will react you poke an incumbent commercially pokum I mean and they're gonna react and that's why I think blockchain may well be a catalyst for change even if incumbents then adopt a lot of that inside the requirements of the course class participation is a hard thing to

judge is a faculty member when I have this many people so but I always think class participation matters we made it 30% it which if you have any advice on this a next semester 30% to to individual write-ups one in the first half which is up to I think lecture 10 which is basically the blockchain fundamentals you pick a topic I don't care which one but it's you'll get you'll get a much better grade if it's about critical reasoning if it's really taking whatever those sets of writings are and and and and and not just

repeating that which is in the readings but really going the next step in saying here's what's going on and this is a business goal you don't have to you know convince me that you know something about computer science it's like critical reasoning about the economic opportunities the strengths the weaknesses the opportunities the threats that old business school sort of saying of swaths with regard to that week's whether it's about hash functions early on cryptography or you sort of wait during the foundational period to permission versus permissionless you pick but to please hand it in before

that classes lecture because I might during the lecture say who wrote today do you want to tell us what you think and it might help spur the class participation and then a second write-up in the second half when we're riffing through the use cases again critical reasoning and then lastly the usual approach of teams of up to four no I don't want teams of five to handle that right now three or four just and and and somewhere in the second half of this semester we'll talk about more the content and there's a couple of you

in here that worked with me last semester and a smaller group you know I want you to do well so I'm gonna sort of give you a sense of like what do we want to do but it's basically the idea is you're an entrepreneur or you're an incumbent and what sort of use case or you're gonna pick and and and whether it's permissioned or permissionless sort of make a proposal do a use case use your critical reasoning around this new technology somewhere in the broad world of finance I mean you know and I'm glad that

define finance really broad you know you'll pick so that's that's kind of a peace act one or the fundamentals I won't go through each of the pieces but you know that's in the syllabus of course Act two is the pivot of the economics and Act three our financial sector use cases and hopefully throughout law will have a lot of fun so the study questions for next Tuesday real quick what are the roles and characteristics of money so I really want to sort of dig behind money money is but a social construct or a social convention

medium of exchange store value unit of account there's some readings about the debate whether money first came from the border system or a really good set of anthropologist and and and and archaeologists and everything say no it actually came as a ledger system and no one knows for sure at ten and fifteen thousand years ago whether money came from the out of the border system or more as a unit of account keeping account of credits and ledger but I'd say when you read through some of those readings you start to think well this is just

a societal construct and so that I will get behind that what is fiat currency fiat currency which is an invention really only over the last few hundred years and we take for granted Dale but how does that fit into that whole history and importantly how to Ledger's accounting Ledger's I know boring stuff but it's probably why we came out of the dark ages so about five or six hundred years ago with double entry bookkeeping sorry hi I like Ledger's we'll talk a little bit about Ledger's and how that fits into money and securities and so

forth and then layering in how Bitcoin fits on top of that history next Tuesday is not deeply about Bitcoin it's just a little dollop on that there'll be five or six readings one of them is a three-minute video the third one it's fun watch it's just a funny little video on what money is there's no need to read nakamoto's full paper when I said the email I mean just the cover email it's one paragraph my goal in the readings each week was not an each session was by and Lord to try to keep less than

50 pages you'd say you're gonna look sometimes you go it looks like it's more and maybe it is I figure you're all gonna figure out for yourself how to sort through the depth of your knowledge but I will predict that some of you may be as much as a quarter or a third of you are gonna go down a rabbit hole one day and you're gonna be doing blockchain for the next 48 hours and you won't know where the time went because it is an addiction at some point that some of you will get because

this is curious notion I'm not predicting that infirmity for all of you I'm just saying some of you will have that happen to you so occasionally I have readings just white a lot it's happen to you let me just conclude and then take any other questions and light up their blockchain I think does provide a peer-to-peer alternative I think that I hope Larry I'll be able to convince it does provide and that peer-to-peer alternative addresses cost of trust it doesn't mean it's the only way to address cost the trust but addresses cost a trust the

financial sector does have challenges not just that it has seven-and-a-half percent of our economy in the US and similar ratios around the globe but resilience how it survives shocks the financial crisis and things like that are real and inclusion one point seven billion people unbanked but then if you look at other products who has access to credit cards and mortgages and the like and then fiat currencies Ken Rogoff and others have written a lot about the instabilities that come that fiat currencies and we'll talk about some of the history why central bank's exist and how

they they came about next key point is we already live in an electronic age Satoshi Nakamoto and Bitcoin didn't create electronic cash electronic cash I mean Sandra Bullock couldn't pay electronically that was 1995 they did a sort of berated movie about it all but by today you pay your tuition online those of you who work get paid online you pay your auto loans online most of our lives are electronic cash not a hundred percent but in some countries like Sweden it's getting very close to a hundred percent we'll learn together and discover that monies but

a social and economic consensus blockchain technology along the crypto finance might be a catalyst for change and they're much masquerades as fact but it's only mere assertion we're gonna try to sort through you know that those differences that doesn't mean that all of you are gonna walk out agreeing with Paul Krugman a Nobel laureate or Nouriel Roubini that this is just a bunch of nonsense some of you might by the way but but I think you'll come out with real critical thinking skills and I hope that some of you will say I figured out actually

where there's a real opportunity in the world of finance to use blockchain technology and make it a better financial sector democratizing finance or somehow providing a service at a lower cost of better service throughout I hope throughout that we'll learn together and we'll have a bit of fun along the way that's kind of my thoughts questions we have exactly what 18 minutes there you go but we can cut it short - I don't care there we go did you tell me your name and we're gonna do placards Ryan's gonna work to figure out you do

placards cuz it's I wonder how our team's form traditionally anybody it's slow and can speak to this too but students do it their own so that the faculty doesn't sort of try to insert themselves to help you but we tend towards the latter half and say well who's formed up in groups and when you know if it's a smaller group it's like well anybody has not yet formed in a team why don't you move to the left hand side of the room and just get together but we could do that electronically - and you know

whether talita and Sabrina who you know good help Internet basically have a social network to help form the teams because this is a big group you're right but that's traditionally people those students do it on their own other questions is anybody gonna go out and sell their Bitcoin now Larry what why are you here no no let to the whole feel and you're incredibly informed about the finance side so I want to see the combination of those and whether at the end I am convinced there's a there there as we've spoken because I could radically

change the cost of trust around the world benefit the developing nation substantially but I think there's a lot of questions I still have I thank you for coming in any week you could be here any day we benefit and I hope it's really this is meant to be a conversation I'm not that far ahead of you Simon Johnson approached me last October and said what do you think about coming up to MIT and and Tom knows this story and and and we were sitting down for lunch in DC and it was a good time in

my life my three girls I have three daughters and I'm a single dad and they were two were in grad school and one our undergrad it was a good time in my life I said why not you know come up here and get engaged in this digital currency initiative over at the Media Lab and I've spent a life I was 18 years ago mid sax on the investment banking side helping people buy and sell companies called mergers and acquisitions and then I went to the trading side fixed income and went off to Asia and did

a bunch of I ran the fixed incoming currency and swap trading in Asia and then my last job was the co Finance Officer so we were about a quarter of a trillion dollar balance sheet at that time go goldman sachs this is we were so private which meant if we lost money we were personally I was a general partner was kaput that's a technical word and but we had we had 700 legal entities and one thousand people who could commit the capital of the firm those are people we generally call traders but you know is

a fascinating period of time I then went on to public service because Bob Rubin knew that I'd be a soft touch - it's a service he was the Treasury secretary I was a former partner at Goldman Sachs and I went off to the US Treasury as a assistant secretary and undersecretary in the late 90s a little different times than we have now for many reasons but we were paying down the debt we were dealing with the Asian debt crisis long-term capital management that Russian debt crisis is it was sort of a fascinating period of time

I worked on a bill with John McCain I didn't get to know Senator McCain that well but it was just remarkable to work with even for a short period of time called ie signature it was a bill that basically said you can sign everything electronically and he was the chair of the Senate Commerce Committee at the time I was a wonderful little yes sometimes in government you can work on small things I worked on the redesign of the currency and I could tell you stories about why it looks the way it does and how you

can redesign paper currency and for a future lecture I'll tell you the one design feature that I it's still in the currency and you can visually say it's because and when I asked for it the fella that rather Bureau of Engraving said why and I said because it looks better and I'm the guy that's approving it and maybe could we get it done can we work this out and and it did look better and he loved it he was worried about the political risk of doing it it was a better design he just was I

said I'll cover you politically let's do it but then I worked with Paul sarbanes and what became sore Baines Oxley I was his senior advisor I worked and kicked around some political campaigns we lost two of them that would be the o8 Hillary campaign and the 16 Hillary campaign I was her chief financial officer I was in a way the senior advisor doing economic policy and outreach and hand-holding and and and then in the middle of those two campaigns I ran something called the Commodity Futures Trading Commission which was post-crisis what do we do this

is a real public policy shortcoming and and I looked at as an opportunity to as I said democratize finance a bit and lower risk and so we tried to bring transparency to a three or four hundred trillion dollar market caught swaps which are just contracts for transference of risk and in their form of a derivative that that were unregulated and we were trying to bring transparency to that and lower risk through central clearing so that's sort of my professional life and as I said I got three daughters and they they're well situated so when Simon

said come on up I said great and I love MIT it's just terrific and and you you all are great unless there's other questions I'm gonna let you go early I [Applause] you